Budget US airlines look clearer for deal takeoff
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Oct 23 (Reuters Breakingviews) -Two budget U.S. airlines have an opportunity to upgrade by joining forces. Frontier ULCC.O may be thinking about bidding again for Spirit Airlines SAVE.N, two years after their proposed merger was gatecrashed by rival JetBlue Airways JBLU.O. Stern trustbusters and $3 billion of debt will be steep hurdles, but a deal also looks clearer for takeoff.
Spirit is at risk of being permanently grounded. The U.S. Department of Justice convinced a judge to nix its $3.8 billion sale to JetBlue in January. Since the day before receiving Frontier’s initial takeover offer, its shares have tumbled 89%. The carrier’s 2024 EBITDA had been estimated last year at $630 million, according to forecasts gathered by Visible Alpha, but it is now expected to lose more than $500 million.
The reasons are many. Shifts in passenger demand, cheaper fares from bigger rivals, and a problem with Pratt & Whitney engines all have left Spirit flirting with bankruptcy and Frontier boss Barry Biffle in the pilot’s seat.
In 2022, Spirit and Frontier were roughly similar sizes in market capitalization terms. The issue was hashing out how to share $500 million of projected cost savings and revenue uplifts. Now, it’s unclear how much equity value will remain at Spirit. Frontier also may be able to push creditors to accept a discount on their holdings.
Spirit shares jumped on the news reported on Tuesday by the Wall Street Journal. Assume its equity is bought at current prices, its debt is fully absorbed, and the same quantum of deal-related synergies can be realized in two years. Even with Spirit’s projected $156 million operating loss, the numbers imply a 9% return, according to Breakingviews calculations.
Considering all of Spirit’s trouble spots, the estimate may be optimistic. Moreover, by acquiring its rival, Frontier may wind up having to boost its pilots’ pay up to Spirit’s level; all told, the target is expected to pay out about a quarter more in wages per seat mile. A few hundred million dollars in extra profit will nevertheless be tempting given that Frontier is projected to generate just $46 million in EBITDA this year.
Biffle also has a better shot at winning over regulators. Spirit executives themselves had warned that JetBlue posed antitrust risks, partly because its suitor’s plan to remodel planes implied higher fares. The judge in the case explicitly left the door open to another deal, but next month’s presidential election looms large. Either way, if Frontier can stay disciplined on price, it’s probably worth taking another flyer.
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CONTEXT NEWS
Frontier has begun exploring a new bid for rival discount carrier Spirit Airlines, the Wall Street Journal reported on Oct. 22, citing unnamed sources.
The two companies had announced a proposed deal in February 2022, before peer JetBlue Airways initiated its own hostile bid for Spirit. JetBlue ultimately prevailed, but a U.S. Justice Department lawsuit blocked the acquisition.
Spirit’s shares have fallen 90% since it originally unveiled the Frontier deal. Spirit is discussing a potential bankruptcy filing with creditors, the Wall Street Journal previously reported. Terms in its agreement with credit card processor U.S. Bank National Association require it to refinance more than $1 billion of bonds before the end of the year.
As of 1120 EDT, Spirit shares were trading up 37% while Frontier’s were down 0.5%.
Frontier and Spirit's fortunes recently diverged https://reut.rs/3Yjh4UR
Editing by Jeffrey Goldfarb and Pranav Kiran
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